Intelligentsia, Stumptown, and Peet’s: Why Craft Coffee Is Consolidating

The recent Peet's Coffee & Tea acquisition of the esteemed third-wave coffee pioneers Stumptown Coffee Roasters and Intelligentsia Coffee sent shockwaves through the specialty beverage community last month. So with October 2015 arguably the biggest milestone month in specialty coffee to date, we can now begin to take a look at the machinery behind the recent shakeup.

Before really tucking into the implications, it's important to note that the recent deals are a consolidation of sorts. Peet's Coffee, based in Emeryville, California and approaching its fiftieth year of business, bought Stumptown outright in the beginning of October from TSG Consumer Partners. Less than a month later, Peet's proceeded to invest a majority share in Intelligentsia, closing the deal just last Friday.

What does the newly-expanded world of Peet’s mean for Intelligentsia, Stumptown, and the third-wave movement?

Peet's is in turn owned by JAB Holding Company, a German investment firm that owns or has a majority stake in the following coffee-related and coffee-specialist companies: Caribou Coffee, Einstein Bros., and Jacobs Douwe Egberts (the largest company in the world to specialize in coffee) to name a few. Not relegating all of its eggs to one (or 10) basket(s), JAB also owns luxury brands like Jimmy Choo and Coty perfume manufacturers. In other words, people with unfathomable assets continue to expand alongside the universe.

According to press releases, these newly acquired brands are expected to remain autonomous, and established brands under the JAB umbrella likely will not be tinkered with, though they could be involved in additional development: take Einstein and Caribou's recently announced collaboration, Coffee & Bagels, as an example). But to understand what the newly-expanded world of Peet's coffee means for Intelligentsia, Stumptown, and the third-wave movement as America knows it, some historical background is in order.

Photo: Jeff Rosen/Flickr

Peet's and the Genesis of Specialty Coffee

Many in the core community of specialty coffee cite Peet's as something of a Moses figure, guiding coffee appreciation out of the Egypt that is burnt-rubber tasting commodity-grade coffee. Hanna Neuschwander, author of Left Coast Roast and communications director at World Coffee Research, notes that Alfred Peet was Starbucks' first supplier, as well as an ideological beacon for the Seattle-based brand throughout the 1970s, incubating the now-monolithic company in its nascence. "Historically, they really were the beginning of specialty coffee as we think of it now," Neuschwander says. "Alfred Peet went up and taught them how to roast. So if we think of Starbucks as the epitome of second-wave and growing the whole category of specialty coffee, creating something that people are willing to pay more money for, that really did start with Peet's." Neuschwander adds that Alfred Peet was notoriously "quality-obsessed," enforcing a code of silence when coffee-tasting was underway. That legacy has endured in the minds of specialty coffee professionals, many of whom found in Peet's or Starbucks a springboard for their own endeavors.

For Intelligentsia's president Doug Zell, the recent buy-in is something of a full-circle moment, as his first coffee job was in the ‘90s at Peet's in Mill Valley, California. "There's always been thoughtfulness at [Peet's]," Zell says. "When we were kicking around the idea of who would be great to work with, Peet's came up first, because they get the business. They've been in it for a long time and their values really line up with ours. So the value of Peet's versus some private equity? They get us. We've known folks like Doug Welsh [Peet's coffee director] for a long time. There's a mutual respect there. That's the piece that makes us comfortable."

Matt Lounsbury, vice president of Stumptown, also pointed to Peet's reputation for longstanding quality, one that nurtured the brilliance of third-wave luminaries of years past, not excluding the founder of Stumptown, Duane Sorenson. "I mean, Duane worked at Peet's for a minute," Lounsbury says, chuckling. "When I first moved to Portland, Peet's was really cool. We have a pretty big handful of employees now that worked at Peet's before joining the company." Some of the more exciting features of Stumptown's consumer outreach program — hosting cuppings, giving homebrew demonstrations, selling homebrew equipment — Lounsbury eventually discovered had quietly taken place at Peet's coffee for quite some time.

Photo: Craig Mitchelldyer/Getty

Advent of the Third Wave

According to Neuschwander, Peet's sourcing philosophy is another explanation for its specialty cachet. "Peet's has always been very involved in farmer programs and understanding their supply chain," she says. This shift to a more hands-on direct-trade model proved a hallmark of the third wave, arguably one the most vital quality-control moves made by coffee professionals.

As detailed in Michaele Weissman's book God In a Cup, a snapshot of the period when specialty coffee forged these direct trade routes, buyers from Peet's, Intelligentsia, Counter Culture, and Stumptown all ran in similar, if not identical, circles at origin. Of the third-wave big three, Counter Culture Coffee, the Durham-based North Carolina roaster, is now the only company operating free of external investment. Additionally, it's stuck to roasting and wholesale — opening training centers instead of cafes for consumers and professionals to learn more about specialty coffee. Its current buyer and quality manager Tim Hill remembers the early days as a time of collaboration whereupon Intelligentsia, Stumptown, and Counter Culture would often split lots that were out-of-reach as individual businesses.

"We expect dynamic growth, but at the same time, it cannot be at the expense of quality."

"[In 2004] I don't think a lot of coffee buyers were traveling to particular origins, like when Geoff [Watts, of Intelligentsia] and Peter [Giuliano, Counter's former director of coffee and co-owner] were going to Rwanda, helping train cuppers, and trying to collaborate with non-governmental agencies to build the coffee market in some of these places. It was a really exciting time [demonstrating] that a buyer can collaborate with the producers that they're buying from," Hill says.

Over a decade later, two-thirds of the third-wave's big three are now looking to fill the fast-growing demand for their coffee, which both Stumptown and Intelligentsia cite as reasons for the mergers. "Frankly, we were just running out of space," says Lounsbury. Zell cites "restrictions on resources" at Intelligentsia leading up to the acquisition. "We could only grow at a certain rate given our internal economics."

With this partnership, Intelligentsia and Stumptown enjoy a more extensive reach, now financially underwritten by their colleagues-turned-sponsors. "This allows us to take our message to wider audience — the sourcing practices, the roasting, the baristas, keeping quality sharp... We expect dynamic growth, but at the same time, it cannot be at the expense of quality," Zell says.

Photo: Mel Melcon/Los Angeles Times via Getty Images

Using Peet's Money to Scale Up

The success of both Intelligentsia's and Stumptown's jump to the next level hinges on sourcing, market share, and logistics. In terms of sourcing, it remains to be seen whether or not the Peet's umbrella will collaborate to create transformative premiums for producers, easily the most vulnerable link the supply chain. Both Stumptown and Intelligentsia say there hasn't been any conversation to this end, only that they will continue the practices that got them here, only on a larger scale. "Do I think that more great coffee could be had in the world, and we can pay a great price to the producers that produce it? I do," Zell says. "[Producers] know there is an economic incentive to do so."

Though the Peet's brands vow to collaborate only where it makes sense for each business, assembling more buying power in the supply chain could qualify as one the more "synergistic opportunities," as Zell puts it, available to the Peet's camp.

When asked about the merger's potential impact, Ric Rhinehart, executive director of the Specialty Coffee Association of America, referred to this type of consolidation as a double-edged sword for producers. Selling to a single customer — i.e. Peet's/Intelligentsia/Stumptown — could offer much-needed pre-financing and risk management strategies to a farmer. Hill of Counter Culture agrees. "If they decided to help farmers from a financing perspective — helping co-operatives hedge and manage the books better, because they might have a larger financial platform that can manage those services — that would definitely be appealing to a lot of co-ops and a lot of buyers," he says.

This kind of consolidation can be a double-edged sword for producers.

The upshot is producers relying too much on, or becoming beholden to a single entity. "While it expands the possibilities for selling more coffee... it also poses the risk that comes from having significant percentages of sales concentrated into a few or a single customer," Rhinehart says.

According to Lounsbury, the recent merger will allow the company to showcase the coffee of a given producer even more. Stumptown hopes to ride the growing popularity of America's new favorite warm-weather elixir with cold brew initiatives launching this week. It will be bottling and distributing single-origin cold brew, a product with a potential to further connect consumers to origin, on a larger scale. Previously, single-origin cold brew had only been plausible at the scale of small batch roasters and independent cafes.

And the recent injection of capital could help tackle challenges in sourcing, logistics, and market share simultaneously. As both brands plan a more expanded retail initiative, one that almost intrinsically stacks the deck against quality purveyors, nearly everyone mentions Peet's distribution model as the best solution to the logistics barrier. Both Intelligentsia and Stumptown expressed an interest in employing Peet's fleet model where appropriate. Peet's Coffee services 13,000 retail locations roasting to order and shipping the same day. An army of 500 Peet's delivery drivers allows an added layer of quality control, bypassing the warehouses and routes of the larger retailers (e.g. Target, Whole Foods, etc), arriving at the grocery store shelf closer to the roast date.

"They are one of businesses lauded for their direct-to-store distribution channel," Hill says of Peet's. "That could certainly help Intelligentsia and Stumptown get more of their coffees to more stores, at a faster rate, with fresher coffee. The challenge of course with growth for all specialty companies is having the supply side keep up with the quality bar they are known for."

While the brands in question test the limitations of coffee within the framework of value and accessibility, some microroasters and independent cafes question the viability of such an endeavor. "We see it mostly on social media," says Peet's CEO Dave Burwick. "People think, ‘Intelligentsia will be dumbed down.' That couldn't be further from the truth; it would the stupidest thing we could ever do... We're just giving them a bigger stage to play on." The Peet's team also argues that it will only provide a stepping stone for consumers. "I think it could create a broader market, where someone's interaction with the kind of coffee we are doing — whether at our shop or on the shelf at Whole Foods — is going to keep getting better," Zell says. "People are going to see that at the upper end of the category: The coffee is worth it, and if anything, it creates a wider, more receptive audience." Zell goes on to cite Patagonia as company that has seen expansion in both quality and value correlative to growth.

SCAA boss Rhinehart points to the new development as both a sign of the healthy market and a chance for microroasters to distinguish themselves. "I would say to smaller roasters that this is a good opportunity for them to shine, focusing on their own sourcing and delivery of exceptional roasted coffee and beverages in their local markets," says Rinehart. "I think that craft coffee enthusiasts will have more opportunities to find these brands [Intelligentsia and Stumptown] locally, and continue to have many great independent roasters to choose from, as well."